GM Traders Most Bearish Ever Versus Ford on Rising Costs

General Motors Co. Chief Executive Officer Mary Barra, who apologized for the 13 deaths linked to the faulty switches, appeared before lawmakers to answer questions about the Detroit-based automaker’s slow response. Photographer: Andrew Harrer/Bloomberg

April 15 (Bloomberg) -- General Motors Co. shares are
having the worst start to a year since returning to the market
after bankruptcy. Traders are bracing for bigger declines.

The cost of GM options, an indicator of demand for
protection against losses in the stock, jumped to a record high
versus Ford Motor Co., data compiled by Bloomberg show. Shares
of the largest U.S. carmaker lost 7.5 percent since recalls
began Feb. 13, wiping out about $4 billion in shareholder value.

Congress and the Justice Department are investigating why
it took so long for GM to recall 2.59 million cars that may have
faulty ignition switches after more than a decade of customer
complaints. The company predicts it will take a $1.3 billion
charge in the first quarter primarily for the cost of repairing
the faulty vehicles. The probe has compounded troubles for Chief
Executive Officer Mary Barra, who is already battling a drop in
U.S. market share while losses continue in Europe.

“The recall issue is not over yet and it won’t go away in
a day or week,” Randy Warren, who manages $100 million as chief
investment officer of Warren Financial Service, said by phone
from Exton, Pennsylvania, on April 8. “There may be more bad
news coming out and you definitely want to be hedged for this.
The reputation damage may impact some people’s buying habits
right now and cause a dip in sales.”

Options Trading

Bearish puts were the four most-active contracts on GM
yesterday, according to data compiled by Bloomberg. While the
stock rose 1.9 percent to $32.55 yesterday, it’s still down 20
percent this year.

Tom Henderson, a spokesman for GM, and Ford’s Susan Krusel
said they wouldn’t comment on the options trading.

Turmoil at GM has boosted options volume as investors look
to insure stock holdings or speculate on future moves. A daily
average of 129,000 contracts have changed hands in the past five
days, about double the level from the past two years, data
compiled by Bloomberg show.

GM’s implied volatility, used to gauge options prices, was
29.4 yesterday, compared with 14.6 for an exchange-traded fund
tracking the Standard & Poor’s 500 Index, according to data
compiled by Bloomberg on three-month options with exercise
prices closest to the shares.

The measure at GM was 7.21 points higher than at Ford. The
gap widened to 7.96 on April 1, the most since GM’s New York
trading debut in 2010, following its 2009 bankruptcy.

Volatility Gauge

The Chicago Board Options Exchange Volatility Index, the
gauge of S&P 500 options prices known as the VIX, slid 3.1
percent to 15.61 today. Its European counterpart, the VStoxx
Index, gained 6.2 percent to 19.64, the most in almost a month.

The recall has taken a toll on GM’s earnings. The company’s
profit is forecast to drop 43 percent during the first quarter,
the biggest decline in at least two years, according to analyst
estimates compiled by Bloomberg. The options market is implying
a one-day move of 3.1 percent following the report.

The shares are cheap relative to the overall market and its
competitors. GM trades at 9.4 times projected earnings, compared
with 11.8 for Ford, data compiled by Bloomberg show. The S&P 500
has a multiple of 15.6.

Barra Apology

Barra, who apologized for the 13 deaths linked to the
faulty switches, appeared before lawmakers to answer questions
about the Detroit-based automaker’s slow response. GM faces at
least 15 federal suits, as well as a U.S. Justice Department
probe and further questions from Congress, the Federal Bureau of
Investigation, the Transportation Department and lawyers the
company hired to investigate itself.

GM said that it had put two engineers on paid leave for
their roles in events leading up to the recalls.

Repairing GM’s reputation is not the only challenge facing
Barra as the automaker struggles to stabilize earnings in
markets outside the U.S. and China. The company said on Feb. 6
that its international operations unit excluding China lost
about $200 million in the fourth quarter, compared with about
$300 million in profit a year earlier. GM, which has lost more
than $18 billion in Europe since 1999, predicted profit will be
weaker in all of its markets this year outside the Americas.

Ford’s Plans

As GM’s recall crisis continues, Ford prepares for its
busiest year of new-model rollouts. The Dearborn, Michigan-based
company said in December that it plans to release 23 new
vehicles globally in 2014, more than double last year’s number.

Sentiment about GM has bottomed and traders should bet on a
rebound as the carmaker has enough cash to reward shareholders,
according to Robert Royle of Smith & Williamson Investment
Management LLP.

GM has $38.3 billion of cash, current marketable securities
and credit available, which it could use to increase its
dividend or buy out the 16 percent of its shares held by its two
largest investors, a union health-care trust and the Canadian
government, Royle said.

“It feels like GM was very much erring on the side of
caution, wanting to get all the bad news out there,” Royle said
by phone from London on April 4. His firm, which manages about
$24 billion, owns GM shares. “While there are worries over the
short-term damage to the brand, sales are still strong and
history shows carmakers will recover. There are also good
reasons to be bullish on GM. It would be very positive if they
were to buy out the two largest shareholders.”

Chevrolet Cobalt

The recall didn’t affect GM car sales in the U.S., which
rose 4.1 percent in March, beating the 0.8 percent gain
projected by analysts. GM no longer makes the Chevrolet Cobalt,
Saturn Ion and other small cars that are the subject of the
recall. Ford’s U.S. light-vehicle sales rose 3.3 percent last
month, three times the increase analysts had predicted.

Ford’s new F-Series pickups may hurt GM’s profitability in
a segment that accounts for more than half of its earnings,
according to Morgan Stanley analysts led by Adam Jonas. The
brokerage has an underweight rating on GM, similar to a sell
recommendation. GM will also need to use its cash to increase
investment before returning it to shareholders, Jonas said.

“There’s a lot of work to do,” Jonas wrote in a client
note dated April 9. “Capex needs must increase -- the cash pile
should not be earmarked for returning. We think the market has
got it right on GM valuation and no longer see significant risk-adjusted upside.”